Question

5. The sales manager is convinced that a 11% reduction in the selling price, combined with a $68,000 increase in advertising, would increase this year's unit sales by 25%. a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? b. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year?

Answer 1

5(a) $1,156,000

5(b) -$104,000

Step-by-step explanation:

5(a)

The reduced selling price

=
`120-13.2`

=
`106.80`

The revised fixed cost

=
`180000+68000`

=
`248000`

The revised number of sales unit

=
`24000* 125 \ percent`

=
`30000 \ units`

Now,

The computation of net operating income will be:

Sales

=
`30000* 106.8`

=
`3,204,000` ($)

Variable costs (less)

=
`30000* 60`

=
`1,800,000` ($)

Contribution margin

=
`Sales-Variable \ cost`

=
`1,404,000` ($)

Fixed costs (less)

=
`248,000` ($)

Net operating income

=
`Contribution \ Margin -Fixed \ cost`

=
`1,156,000` ($)

5(b)

The net operating will decrease over last year will be:

=
`1,156,000-1,260,000`

=
`-104,000` ($)